Until the mid 1980s Foreign Investors who were well advised never paid any U.S. federal income tax or capital gains tax.
Until that time the U.S. had a treaty with the Netherlands Antilles by virtue of that country’s relationship with the Netherlands. The treaty permitted certain deductions and elections that legally led to minimum taxation of Foreign Investors of real estate. This was all corrected during the Reagan administration in the 1980s and that produced the present taxation pattern that governs Foreign Investors in U.S. real state.
A new section was added to the Internal Revenue laws, Code Section 897, that carved out a unique set of tax rules that apply only to real estate income.
That taxation pattern attempted to make sure that a Foreign Investor paid at least one U.S. tax on operating income and one tax on capital gain.
However, what seemed simple became an entire body of tax law, and because of the complexities of U.S. tax laws; it is often possible for a Foreign Investor to pay no tax on income that is essentially derived from real estate profits or to pay significant double taxes and even more.
